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TDS reports second quarter 2017 results

As previously announced, TDS will hold a teleconference August 4, 2017, at 9:30 a.m. CDT. Listen to the call live via the Events & Presentations page of investors.tdsinc.com.

Telephone and Data Systems, Inc. (NYSE:TDS) reported total operating revenues of $1,247 million for the second quarter of 2017, versus $1,295 million for the same period one year ago. Net income attributable to TDS shareholders and related diluted earnings per share were $10 million and $0.09, respectively, for the second quarter of 2017, compared to $28 million and $0.25 respectively, in the same period one year ago.

"TDS' businesses achieved good results in the quarter as they continued executing on their strategic priorities for 2017," said LeRoy T. Carlson Jr., TDS president and CEO. "U.S. Cellular grew its postpaid handset customer base and increased customer loyalty. TDS Telecom drove growth in IPTV and cable connections and increased revenues in both its wireline and cable segments.

"U.S. Cellular grew postpaid handsets and drove an exceptionally low level of handset churn, the lowest in the company's history. It successfully completed the first commercial deployment of Voice over LTE (VoLTE) technology in Iowa, bringing benefits to customers' network experience and opening opportunities for greater data roaming revenue. U.S. Cellular effectively managed cost reductions throughout the quarter, lowering expenses in system operations, loss on equipment and other operating expenses.

"TDS Telecom grew its Wireline business through an increase in IPTV connections that generated higher residential revenue per connection. They continue to see growth in service revenues from fiber investments and through support from the Alternative Connect America Cost Model (A-CAM). TDS Telecom's Cable segment had an excellent quarter, driving significant increases in broadband connections and residential revenues. They continued to keep cash expenses low, driving a strong increase in profitability. OneNeck IT Solutions had lower revenues this quarter due primarily to less equipment sales to existing customers. They are focused on sales execution as their top priority."

2017 Estimated ResultsCurrent estimates of full-year 2017 results for U.S. Cellular, TDS Telecom, and TDS are shown below. Such estimates represent management's view as of August 4, 2017. Such forward-looking statements should not be assumed to be current as of any future date. TDS undertakes no duty to update such information, whether as a result of new information, future events, or otherwise. There can be no assurance that final results will not differ materially from such estimated results.

2017 Estimated Results

U.S. Cellular

TDS Telecom

TDS(3)

Current

Previous

Current

Previous

Current

Previous

(Dollars in millions)

Total operating revenues (1)

$3,800-$4,000

Unchanged

$1,200-$1,250

Unchanged

$5,015-$5,265

Unchanged

Adjusted OIBDA (1)(2)(4)

$550-$650

Unchanged

$300-$340

Unchanged

$855-$995

Unchanged

Adjusted EBITDA (2)

$700-$800

Unchanged

$300-$340

Unchanged

$1,005-$1,145

Unchanged

Capital expenditures (Approximately)

$500

Unchanged

$225

Unchanged

$735

Unchanged

The following tables provide reconciliations of Net income to Adjusted OIBDA and Adjusted EBITDA for 2017 estimated results, actual results for the six months ended June 30, 2017, and actual results for the year ended December 31, 2016. In providing 2017 estimated results, TDS has not completed the below reconciliation to net income because it does not provide guidance for income taxes. Although potentially significant, TDS believes that the impact of income taxes cannot be reasonably predicted; therefore, TDS is unable to provide such guidance.

2017 Estimated Results

U.S. Cellular

TDS Telecom

TDS(3)

(Dollars in millions)

Net income (loss) (GAAP)

N/A

N/A

N/A

Add back:

Income tax expense (benefit)

N/A

N/A

N/A

Income (loss) before income taxes (GAAP)

$

(30)-70

$

80-120

$

(10)-130

Add back:

Interest expense

110

–

165

Depreciation, amortization and accretion expense

620

220

850

EBITDA (Non-GAAP)

$

700-800

$

300-340

$

1,005-1,145

Add back:

(Gain) loss on sale of business and other exit costs, net

–

–

–

(Gain) loss on license sales and exchanges, net

(20)

–

(20)

(Gain) loss on asset disposals, net

20

–

20

Adjusted EBITDA (Non-GAAP) (2)

$

700-800

$

300-340

$

1,005-1,145

Deduct:

Equity in earnings of unconsolidated entities

140

–

140

Interest and dividend income(1)

10

–

10

Adjusted OIBDA (Non-GAAP)(1)(2)(4)

$

550-650

$

300-340

$

855-995

Actual Results

Six Months Ended June 30, 2017

Year ended December 31, 2016

U.S. Cellular

TDS

Telecom

TDS (3)

U.S. Cellular

TDS

Telecom

TDS (3)

(Dollars in millions)

Net income (GAAP)

$

40

$

33

$

55

$

49

$

42

$

52

Add back:

Income tax expense

33

21

44

33

25

40

Income before income taxes

(GAAP)

$

73

$

54

$

99

$

82

$

67

$

92

Add back:

Interest expense

56

2

85

113

3

170

Depreciation, amortization and accretion expense

307

111

422

618

224

850

EBITDA (Non-GAAP)

$

436

$

167

$

606

$

813

$

294

$

1,112

Add back:

(Gain) loss on sale of business and other exit costs, net

–

–

–

–

–

(1)

(Gain) loss on license sales and exchanges, net

(19)

–

(19)

(19)

(1)

(20)

(Gain) loss on asset disposals, net

9

1

10

22

4

27

Adjusted EBITDA (Non-GAAP) (2)

$

426

$

168

$

597

$

816

$

298

$

1,118

Deduct:

Equity in earnings of unconsolidated entities

66

–

65

140

–

140

Interest and dividend income(1)

5

2

8

6

3

11

Other, net

(1)

–

1

1

–

–

Adjusted OIBDA (Non-GAAP) (1)(2)(4)

$

356

$

166

$

523

$

669

$

295

$

967

Note: Totals may not foot due to rounding differences.

(1)

Equipment installment plan interest income is reflected as a component of Service revenues consistent with an accounting policy change effective January 1, 2017. All prior period numbers have been recast to conform to this accounting change.

(2)

Adjusted EBITDA is defined as net income adjusted for the items set forth in the reconciliation above. Adjusted OIBDA is defined as net income adjusted for the items set forth in the reconciliation above. Adjusted EBITDA and Adjusted OIBDA are not measures of financial performance under Generally Accepted Accounting Principles in the United States (GAAP) and should not be considered as alternatives to Net income or Cash flows from operating activities, as indicators of cash flows or as measures of liquidity. TDS does not intend to imply that any such items set forth in the reconciliation above are non-recurring, infrequent or unusual; such items may occur in the future. Management uses Adjusted EBITDA and Adjusted OIBDA as measurements of profitability, and therefore reconciliations to Net income are deemed appropriate. Management believes Adjusted EBITDA and Adjusted OIBDA are useful measures of TDS' operating results before significant recurring non-cash charges, gains and losses, and other items as presented above as they provide additional relevant and useful information to investors and other users of TDS' financial data in evaluating the effectiveness of its operations and underlying business trends in a manner that is consistent with management's evaluation of business performance. Adjusted EBITDA shows adjusted earnings before interest, taxes, depreciation, amortization and accretion, and gains and losses, while Adjusted OIBDA reduces this measure further to exclude Equity in earnings of unconsolidated entities and Interest and dividend income in order to more effectively show the performance of operating activities excluding investment activities. The table above reconciles Adjusted EBITDA and Adjusted OIBDA flow to the corresponding GAAP measure, Net income or Income before income taxes.

(3)

The TDS column includes U.S. Cellular, TDS Telecom and also the impacts of consolidating eliminations, corporate operations and non-reportable segments, all of which are not presented above.

(4)

A reconciliation of Adjusted OIBDA (Non-GAAP) to Operating income (GAAP) for June 30, 2017 actual results can be found on TDS' website at investors.tdsinc.com.

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About TDSTelephone and Data Systems, Inc. (TDS), a Fortune 1000® company, provides wireless; cable and wireline broadband, TV and voice; and hosted and managed services to approximately 6 million connections nationwide through its businesses, U.S. Cellular, TDS Telecom, OneNeck IT Solutions, and BendBroadband. Founded in 1969 and headquartered in Chicago, TDS employed 10,000 people as of June 30, 2017.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995:All information set forth in this news release, except historical and factual information, represents forward-looking statements. This includes all statements about the company's plans, beliefs, estimates, and expectations. These statements are based on current estimates, projections, and assumptions, which involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Important factors that may affect these forward-looking statements include, but are not limited to: intense competition; the ability to execute TDS' business strategy; uncertainties in TDS' future cash flows and liquidity and access to the capital markets; the ability to make payments on TDS and U.S. Cellular indebtedness or comply with the terms of debt covenants; impacts of any pending acquisitions/divestitures/exchanges of properties and/or licenses, including, but not limited to, the ability to obtain regulatory approvals, successfully complete the transactions and the financial impacts of such transactions; the ability of the company to successfully manage and grow its markets; the access to and pricing of unbundled network elements; the ability to obtain or maintain roaming arrangements with other carriers on acceptable terms; the state and federal telecommunications regulatory environment; the value of assets and investments; adverse changes in the ratings of TDS and U.S. Cellular debt securities by accredited ratings organizations; industry consolidation; advances in telecommunications technology; pending and future litigation; changes in income tax rates, laws, regulations or rulings; changes in customer growth rates, average monthly revenue per user, churn rates, roaming revenue and terms, the availability of wireless devices, or the mix of services and products offered by U.S. Cellular and TDS Telecom. Investors are encouraged to consider these and other risks and uncertainties that are discussed in the Form 8-K Current Report used by TDS to furnish this press release to the Securities and Exchange Commission, which are incorporated by reference herein.

Average Revenue Per User (ARPU) - metric is calculated by dividing a revenue base by an average number of connections and by the number of months in the period. These revenue bases and connection populations are shown below:

?

Postpaid ARPU consists of total postpaid service revenues and postpaid connections.

?

Prepaid ARPU consists of total prepaid service revenues and prepaid connections.

(2)

Average Billings Per User (ABPU) - non-GAAP metric is calculated by dividing total postpaid service revenues plus equipment installment plan billings by the average number of postpaid connections and by the number of months in the period. Refer to the end of this release for a reconciliation of this metric to its most comparable GAAP metric.

(3)

Average Revenue Per Account (ARPA) - metric is calculated by dividing total postpaid service revenues by the average number of postpaid accounts and by the number of months in the period.

(4)

Average Billings Per Account (ABPA) - non-GAAP metric is calculated by dividing total postpaid service revenues plus equipment installment plan billings by the average number of postpaid accounts and by the number of months in the period. Refer to the end of this release for a reconciliation of this metric to its most comparable GAAP metric.

(5)

Churn rate represents the percentage of the connections that disconnect service each month. These rates represent the average monthly churn rate for each respective period.

(6)

Includes reseller and other connections.

(7)

Market penetration is calculated by dividing the number of wireless connections at the end of the period by the total population of consolidated operating markets as estimated by Nielsen.

The number of Wireline customers provided high-capacity data circuits via various technologies, including DSL and dedicated internet circuit technologies.

(3)

The number of Wireline customers provided video services using IP networking technology.

(4)

Total residential revenue per connection is calculated by dividing total Wireline residential revenue by the average number of Wireline residential connections and by the number of months in the period.

(5)

The number of telephone handsets, data lines and IP trunks providing communications using IP networking technology.

(6)

Billable number of lines into a building for high-speed data services.

(7)

Generally, a home or business receiving video programming counts as one video connection. In counting bulk residential or commercial connections, such as an apartment building or hotel, connections are counted based on the number of units/rooms within the building receiving service.

(8)

Billable number of lines into a building for voice services.

TDS Telecom

Capital Expenditures (Unaudited)

Quarter Ended

6/30/2017

3/31/2017

12/31/2016

9/30/2016

6/30/2016

(Dollars in millions)

Wireline

$

33

$

17

$

26

$

27

$

27

Cable

12

9

13

11

17

HMS

4

6

5

2

2

$

49

$

33

$

45

$

40

$

46

Numbers may not foot due to rounding.

Telephone and Data Systems, Inc.

Consolidated Statement of Operations Highlights

(Unaudited)

Three Months Ended June 30,

2017

2016

2017 vs. 2016

Increase (Decrease)

(Dollars and shares in millions, except per share amounts)

Operating revenues

U.S. Cellular (1)

$

963

$

992

$

(29)

(3)%

TDS Telecom

281

300

(18)

(6)%

All Other (2)

3

3

–

-

1,247

1,295

(48)

(4)%

Operating expenses

U.S. Cellular

Expenses excluding depreciation, amortization and accretion

800

812

(12)

(2)%

Depreciation, amortization and accretion

155

154

1

-

(Gain) loss on asset disposals, net

5

5

–

6%

(Gain) loss on license sales and exchanges, net

(2)

(9)

7

81%

958

962

(4)

(1)%

TDS Telecom

Expenses excluding depreciation, amortization and accretion

201

221

(20)

(9)%

Depreciation, amortization and accretion

55

54

1

3%

(Gain) loss on asset disposals, net

1

1

–

(30)%

257

275

(19)

(7)%

All Other (2)

Expenses excluding depreciation and amortization

3

3

–

40%

Depreciation and amortization

1

2

–

(9)%

(Gain) loss on asset disposals, net

–

–

–

>(100)%

4

5

–

19%

Total operating expenses

1,219

1,242

(23)

(2)%

Operating income (loss)

U.S. Cellular (1)

5

30

(25)

(82)%

TDS Telecom

25

24

–

1%

All Other (2)

(2)

(1)

–

>(100)%

28

53

(25)

(47)%

Investment and other income (expense)

Equity in earnings of unconsolidated entities

33

36

(3)

(9)%

Interest and dividend income (1)

4

3

1

15%

Interest expense

(43)

(43)

–

-

Other, net

–

1

(1)

>100%

Total investment and other income (expense)(1)

(6)

(3)

(3)

(78)%

Income before income taxes

22

50

(28)

(55)%

Income tax expense

10

18

(8)

(45)%

Net income

12

32

(20)

(62)%

Less: Net income attributable to noncontrolling interests, net of tax

2

4

(2)

(49)%

Net income attributable to TDS shareholders

10

28

(18)

(63)%

TDS Preferred dividend requirement

–

–

–

N/M

Net income available to common shareholders

$

10

$

28

$

(18)

(63)%

Basic weighted average shares outstanding

111

109

2

1%

Basic earnings per share attributable to TDS shareholders

$

0.09

$

0.25

$

(0.16)

(64)%

Diluted weighted average shares outstanding

112

111

1

1%

Diluted earnings per share attributable to TDS shareholders

$

0.09

$

0.25

$

(0.16)

(64)%

N/M - Percentage change not meaningful

Numbers may not foot due to rounding.

(1)

Equipment installment plan interest income is reflected as a component of Service revenues consistent with an accounting policy change effective January 1, 2017. All prior period numbers have been recast to conform to this accounting change.

(2)

Consists of TDS corporate, intercompany eliminations and all other business operations not included in the U.S. Cellular and TDS Telecom segments.

Telephone and Data Systems, Inc.

Consolidated Statement of Operations Highlights

(Unaudited)

Six Months Ended June 30,

2017

2016

2017 vs. 2016

Increase (Decrease)

(Dollars and shares in millions, except per share amounts)

Operating revenues

U.S. Cellular(1)

$

1,899

$

1,962

$

(63)

(3)%

TDS Telecom

580

581

(1)

-

All Other(2)

6

7

(1)

(4)%

2,485

2,550

(65)

(3)%

Operating expenses

U.S. Cellular

Expenses excluding depreciation, amortization and accretion

1,543

1,613

(70)

(4)%

Depreciation, amortization and accretion

307

307

–

-

(Gain) loss on asset disposals, net

9

10

(1)

(12)%

(Gain) loss on license sales and exchanges, net

(19)

(9)

(10)

>(100)%

1,840

1,921

(81)

(4)%

TDS Telecom

Expenses excluding depreciation, amortization and accretion

414

426

(12)

(3)%

Depreciation, amortization and accretion

111

112

(1)

(1)%

(Gain) loss on asset disposals, net

1

2

(1)

(28)%

527

540

(13)

(2)%

All Other(2)

Expenses excluding depreciation and amortization

5

5

–

2%

Depreciation and amortization

4

3

–

(10)%

(Gain) loss on asset disposals, net

–

–

–

57%

8

8

–

(3)%

Total operating expenses

2,375

2,469

(94)

(4)%

Operating income (loss)

U.S. Cellular(1)

59

41

18

45%

TDS Telecom

53

41

12

29%

All Other(2)

(2)

(1)

(1)

(1)%

110

81

29

38%

Investment and other income (expense)

Equity in earnings of unconsolidated entities

65

72

(7)

(9)%

Interest and dividend income(1)

8

5

3

36%

Interest expense

(85)

(85)

–

(1)%

Other, net

1

–

1

>100%

Total investment and other income (expense)(1)

(11)

(8)

(3)

(53)%

Income before income taxes

99

73

26

36%

Income tax expense

44

31

13

43%

Net income

55

42

13

31%

Less: Net income attributable to noncontrolling interests, net of tax

8

6

2

24%

Net income attributable to TDS shareholders

47

36

11

32%

TDS Preferred dividend requirement

–

–

–

(50)%

Net income available to common shareholders

$

47

$

36

$

11

32%

Basic weighted average shares outstanding

110

109

1

1%

Basic earnings per share attributable to TDS shareholders

$

0.43

$

0.33

$

0.10

30%

Diluted weighted average shares outstanding

112

111

1

1%

Diluted earnings per share attributable to TDS shareholders

$

0.42

$

0.32

$

0.10

31%

Numbers may not foot due to rounding.

(1)

Equipment installment plan interest income is reflected as a component of Service revenues consistent with an accounting policy change effective January 1, 2017. All prior period numbers have been recast to conform to this accounting change.

(2)

Consists of TDS corporate, intercompany eliminations and all other business operations not included in the U.S. Cellular and TDS Telecom segments.

U.S. Cellular Common Shares reissued for benefit plans, net of tax payments

–

3

Repurchase of TDS Common Shares

–

(3)

Repurchase of U.S. Cellular Common Shares

–

(2)

Repurchase of TDS Preferred Shares

(1)

–

Dividends paid to TDS shareholders

(34)

(32)

Payment of debt issuance costs

–

(4)

Distributions to noncontrolling interests

(2)

(1)

Other financing activities

1

9

Net cash used in financing activities

(43)

(34)

Net decrease in cash and cash equivalents

(109)

(86)

Cash and cash equivalents

Beginning of period

900

985

End of period

$

791

$

899

Telephone and Data Systems, Inc.

Consolidated Balance Sheet Highlights

(Unaudited)

ASSETS

June 30,

December 31,

2017

2016

(Dollars in millions)

Current assets

Cash and cash equivalents

$

791

$

900

Accounts receivable from customers and others, net

845

851

Inventory, net

149

151

Prepaid expenses

111

115

Income taxes receivable

2

10

Other current assets

26

32

Total current assets

1,924

2,059

Assets held for sale

4

8

Licenses

2,235

1,895

Goodwill

770

766

Franchise rights

244

244

Other intangible assets, net

28

33

Investments in unconsolidated entities

452

451

Other investments

–

1

Property, plant and equipment, net

3,373

3,555

Other assets and deferred charges

348

434

Total assets

$

9,378

$

9,446

Telephone and Data Systems, Inc.

Consolidated Balance Sheet Highlights

(Unaudited)

LIABILITIES AND EQUITY

June 30,

December 31,

2017

2016

(Dollars and shares in millions, except per share amounts)

Current liabilities

Current portion of long-term debt

$

12

$

12

Accounts payable

295

365

Customer deposits and deferred revenues

218

229

Accrued interest

11

11

Accrued taxes

85

44

Accrued compensation

78

127

Other current liabilities

87

99

Total current liabilities

786

887

Deferred liabilities and credits

Deferred income tax liability, net

899

922

Other deferred liabilities and credits

472

453

Long-term debt, net

2,428

2,433

Noncontrolling interests with redemption features

1

1

Equity

TDS shareholders' equity

Series A Common and Common Shares, par value $.01

1

1

Capital in excess of par value

2,393

2,386

Treasury shares, at cost

(684)

(698)

Accumulated other comprehensive income

–

1

Retained earnings

2,457

2,454

Total TDS shareholders' equity

4,167

4,144

Preferred shares

–

1

Noncontrolling interests

625

605

Total equity

4,792

4,750

Total liabilities and equity

$

9,378

$

9,446

Balance Sheet Highlights

(Unaudited)

June 30, 2017

U.S.

TDS

TDS Corporate

Intercompany

TDS

Cellular

Telecom

& Other

Eliminations

Consolidated

(Dollars in millions)

Cash and cash equivalents

$

472

$

22

$

297

$

–

$

791

Affiliated cash investments

–

499

–

(499)

–

$

472

$

521

$

297

$

(499)

$

791

Licenses, goodwill and other intangible assets

$

2,596

$

820

$

(139)

$

–

$

3,277

Investment in unconsolidated entities

414

4

40

(6)

452

$

3,010

$

824

$

(99)

$

(6)

$

3,729

Property, plant and equipment, net

$

2,304

$

1,043

$

26

$

–

$

3,373

Long-term debt, net:

Current portion

$

11

$

–

$

1

$

–

$

12

Non-current portion

1,613

2

813

–

2,428

$

1,624

$

2

$

814

$

–

$

2,440

TDS Telecom Highlights

(Unaudited)

Three Months Ended June 30,

2017 vs. 2016

2017

2016

Increase (Decrease)

(Dollars in millions)

Wireline

Operating revenues

Residential

$

81

$

77

$

4

5%

Commercial

50

53

(3)

(6)%

Wholesale

49

44

5

10%

Total service revenues

180

175

5

3%

Equipment sales

–

–

–

(36)%

181

175

5

3%

Operating expenses

Cost of services

65

64

2

3%

Cost of equipment sold

1

–

–

22%

Selling, general and administrative expenses

48

49

(1)

(2)%

Expenses excluding depreciation, amortization and accretion

114

113

1

1%

Depreciation, amortization and accretion

37

37

–

1%

(Gain) loss on asset disposals, net

–

1

–

(46)%

152

151

1

1%

Operating income

$

29

$

25

$

4

17%

Cable

Operating revenues

Residential

$

41

$

36

$

5

15%

Commercial

9

9

–

1%

51

45

5

12%

Operating expenses

Cost of services

24

24

–

1%

Selling, general and administrative expenses

13

12

1

4%

Expenses excluding depreciation, amortization and accretion

37

36

1

2%

Depreciation, amortization and accretion

11

9

2

18%

(Gain) loss on asset disposals, net

–

–

–

(5)%

48

46

2

5%

Operating income

$

3

$

–

$

3

>100%

HMS

Operating revenues

Service revenues

$

27

$

33

$

(5)

(16)%

Equipment sales

23

47

(24)

(51)%

51

80

(29)

(37)%

Operating expenses

Cost of services

21

19

2

11%

Cost of equipment sold

19

39

(20)

(51)%

Selling, general and administrative expenses

10

15

(4)

(29)%

Expenses excluding depreciation, amortization and accretion

51

73

(22)

(30)%

Depreciation, amortization and accretion

7

7

(1)

(7)%

58

80

(22)

(28)%

Operating loss

$

(7)

$

–

$

(7)

>(100)%

Intercompany revenues

$

(1)

$

(1)

$

–

12%

Intercompany expenses

(1)

(1)

–

12%

Total TDS Telecom operating income

$

25

$

24

$

–

1%

Numbers may not foot due to rounding.

TDS Telecom Highlights

(Unaudited)

Six Months Ended June 30,

2017 vs. 2016

2017

2016

Increase (Decrease)

(Dollars in millions)

Wireline

Operating revenues

Residential

$

160

$

153

$

7

4%

Commercial

101

107

(6)

(6)%

Wholesale

98

87

11

12%

Total service revenues

359

347

12

3%

Equipment sales

1

1

–

(37)%

360

348

11

3%

Operating expenses

Cost of services

129

126

3

2%

Cost of equipment sold

1

1

–

13%

Selling, general and administrative expenses

96

98

(2)

(2)%

Expenses excluding depreciation, amortization and accretion

226

224

1

1%

Depreciation, amortization and accretion

76

78

(2)

(3)%

(Gain) loss on asset disposals, net

1

1

–

(40)%

302

304

(1)

-

Operating income

$

57

$

45

$

13

28%

Cable

Operating revenues

Residential

$

82

$

72

$

11

15%

Commercial

18

19

(1)

(4)%

100

90

10

11%

Operating expenses

Cost of services

48

46

2

4%

Selling, general and administrative expenses

25

24

1

3%

Expenses excluding depreciation, amortization and accretion

73

70

3

4%

Depreciation, amortization and accretion

21

18

3

14%

(Gain) loss on asset disposals, net

1

1

–

(15)%

95

90

5

6%

Operating income

$

5

$

1

$

5

>100%

HMS

Operating revenues

Service revenues

$

56

$

62

$

(6)

(9)%

Equipment sales

66

82

(17)

(20)%

122

144

(22)

(15)%

Operating expenses

Cost of services

42

40

1

4%

Cost of equipment sold

55

68

(14)

(20)%

Selling, general and administrative expenses

21

25

(4)

(16)%

Expenses excluding depreciation, amortization and accretion

118

134

(16)

(12)%

Depreciation, amortization and accretion

14

15

(1)

(7)%

131

148

(17)

(12)%

Operating loss

$

(9)

$

(4)

$

(5)

>(100)%

Intercompany revenues

$

(2)

$

(2)

$

–

5%

Intercompany expenses

(2)

(2)

–

5%

Total TDS Telecom operating income

$

53

$

41

$

12

29%

Numbers may not foot due to rounding.

Telephone and Data Systems, Inc.

Financial Measures and Reconciliations

Free Cash Flow

Three Months Ended June 30,

Six Months Ended June 30,

2017

2016

2017

2016

(Dollars in millions)

Cash flows from operating activities (GAAP)

$

221

$

154

$

358

$

400

Less: Cash paid for additions to property, plant and equipment

115

122

242

281

Free cash flow (Non-GAAP)(1)

106

32

116

119

(1)

Management uses Free cash flow as a liquidity measure and it is defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment. Free cash flow is a non-GAAP financial measure which TDS believes may be useful to investors and other users of its financial information in evaluating liquidity, specifically, the amount of net cash generated by business operations after deducting Cash paid for additions to property, plant and equipment.

Postpaid ABPU and Postpaid ABPA

U.S. Cellular presents Postpaid ABPU and Postpaid ABPA to reflect the revenue shift from Service revenues to Equipment and product sales resulting from the increased adoption of equipment installment plans. Postpaid ABPU and Postpaid ABPA, as previously defined, are non-GAAP financial measures which U.S. Cellular believes are useful to investors and other users of its financial information in showing trends in both service and equipment and product sales revenues received from customers.